Introduction to financial reporting and standards

Introduction to financial reporting standards. basics and approaches to finanical reporting

1. Prepared by- : Dr. Manjula Gupta Assistant Professor Maharaja Agrasen University Baddi Introduction to Financial Reporting

2. Meaning Financial reporting is the process of documenting and communicating financial activities and performance over specific time periods, typically on a quarterly or yearly basis. Companies use financial reports to organize accounting data and report on current financial status. Financial reports are also essential in the projections of future profitability, industry position and growth, and many financial reports are available for public review. There are several primary statements to use when reporting financial data, and the information you include in these documents fulfills several key objectives of financial reporting:

3. Importance of financial reporting Tracking income and expenses :Tracking income and expenses is an important process that financial reporting supports. Monitoring financial documentation is necessary for effective debt management and budget allocation and provides insight into key areas of spending. Monitoring income and expenses ensures companies track debts regularly to remain transparent in competitive markets. Therefore, financial reporting gives you documentation methods to track current liabilities and assets. Ensures compliance: Financial reporting encompasses specific processes that companies follow to comply with mandatory accounting regulations. Each document you use to evaluate financial activities comes under the review of several financial regulatory institutions. This makes accurate documentation crucial to ensure all financial reports comply with tax regulations and financial reporting criteria. Accurate financial reporting also simplifies tax, valuation and auditing processes, reducing the time to complete necessary financial obligations and further validating financial compliance.  

4. CONT.. Communicates essential data: Key shareholders, executives, investors and professionals all rely on current financial data to make decisions, plan budgets and monitor performance. The importance of open communication and transparency is necessary to support funding, investment opportunities and financial review. Many investors and creditors rely on the information companies communicate in financial documentation to assess profitability, risk and future returns. Supports financial analysis and decision- making: Financial reporting is crucial for performing analysis to support business decisions. Using financial statements improves accountability and supports the analysis of critical financial data. Documents like the income statement and balance sheet provide real-time information that you can use to track historical performance, identify key areas of spending and create forecasts more accurately.

5. Objectives of Financial Reporting

6. Importance of Financial Reporting

7. Qualitative Characteristics of Financial Reporting Faithful representation :Financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena but must faithfully represent the substance of the phenomena that it purports to represent’ To be a faithful representation, information must be complete, neutral and free from error. A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations. Comparability: Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items’ (Conceptual Framework: para . 2.25). ‘Information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or date’

8. HISTORY History of Accounting As in other spheres, India was a pioneer in the field of accounting too. As Prof. Max Mueller observed “ Whatever sphere of the human mind you may select for your study , whether be it language, or religion, or mythology , or philosophy, whether be it laws or customs , primitive art or primitive science, everywhere you have to go to India, whether you like it or not , because some of the most valuable & most instructive materials are treasured up in India, & in India only.”

9. CONT.. Sufficient evidence exists to conclude that art and practice of accounting existed even in Vedic times . There are references to kraya (sale), Vanij (merchant), sulka (price) in Rigveda . Kautilya’s Arthashastra contains details on business of keeping up accounts in the office of accountants .It provides details of matters which should be recorded, registers to be maintained, system of examination of accounts and even details of punishments for default. Authors, however, generally trace the origin to times of Babylonian Empire around 3500 B.C. Some of the oldest records of commerce have been found in the Assyrian, Chaldaean -Babylonian and Sumerian civilizations which were flourishing in the Mesopotamian Valley. During this era (which lasted until 500 B.C.), Sumeria was a theocracy whose rulers held most land and animals in trust for their gods, giving impetus to their record-keeping efforts. Moreover, the legal codes that evolved penalized the failure to memorialize transactions. The Code of Hammurabi, for example, required that an agent selling goods for a merchant give the merchant a price quotation under seal or face invalidation of a questioned agreement.

10. CONT.. The Mesopotamian equivalent of today’s accountant was the scribe. His duties included writing up the transaction and ensuring that the agreements complied with the detailed code requirements for commercial transactions. A typical transaction involved : The parties willing to transact sought  the scribe at the gates to the city. They would describe their agreement to the scribe, who use  a small quantity of specially prepared clay to record the transaction. The moist clay was molded into a size and shape adequate to contain the terms of the agreement. Using a wooden stylus, the scribe recorded the names of the contracting parties, the goods and money exchanged and any other promises made. The parties then “signed” their names to the tablet by impressing their respective seals. Men carried their signatures around their necks in the form of stone amulets engraved with the wearer’s mark, The scribe would dry the tablet in the sun or in a kiln for important transactions which needed a more permanent record. Sometimes a thick clay layer was fashioned and wrapped around the tablet like an envelope. For extra security, the whole transaction would be rewritten on this outer “crust,” in effect making a carbon copy of the original. Attempted alterations of the envelope could be detected by comparing it with its contents, and the original could not be altered without cracking off and destroying the outer shell.

11. CONT.. ‘Consistency: Consistency refers to the use of the same methods for the same items ( ie consistency of treatment) either from period to period within a reporting entity or in a single period across entities’ The disclosure of accounting policies is particularly important here. Users must be able to distinguish between different accounting policies in order to be able to make a valid comparison of similar items in the accounts of different entities. Verifiability Verifiability . Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. It means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation

12. CONT.. Timeliness: Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. There is a balance between timeliness and the provision of reliable information. If information is reported on a timely basis when not all aspects of the transaction are known, it may not be complete or free from error. Conversely, if every detail of a transaction is known, it may be too late to publish the information because it has become irrelevant

13. Efficient Corporate Disclosure